Vera Laboratories: Below Average

Score: Below Average

Sanjiv Shankaran

VERA Laboratories has approached the primary market with a rights issue of 1.62 crore equity shares at an offer price of Rs. 10 per share. The issue aims to raise Rs. 16.27 crores. Shareholders may consider avoiding further exposure to the company for the following reasons.

Vera Laboratories is a Rs. 32-crore bulk drug company that has been affected by the stiff competition and declining realisation in the domestic bulk drug industry.

The outcome was Vera Labs recorded an operating loss of Rs. 6.14 crores on sales of Rs. 32 crores in 1999. The preceding three years were marked by declining operating profit.

The offer document contains unaudited results for the 11 months-ended May 2000. The unaudited results suggests that the company is likely to have registered a net loss in 1999-2000 largely on account of the heavy interest expense borne by the company.

The heavy interest expense follows the increasing reliance on borrowed funds by Vera. Over the last three years, borrowed funds have doubled, while that of shareholders have been eroded by the huge loss in 1999. The offer document indicates that the rights offer is largely meant to reduce the debt burden.

Vera Labs hopes to overcome its problems by gaining a foothold in the market for generic medicines in Europe and the US. The company has achieved a small degree of success by gaining an entry into Europe. However, investors may keep in mind that gaining an entry into the developed markets is not easy because of the high level of regulatory compliance required. This, in turn, leads to resources being locked up in getting the clearances.

The weak financial position and the remote possibility of better realisations in the bulk drug market may also not help generate the kind of resources that may be required for a thrust into the developed markets.

Vera Labs' current market price is Rs. 6.25, a significant discount to the offer price. Against this backdrop, shareholders may consider avoiding the rights offer.

Industry type :Pharmaceuticals

Issue type :Rights issue of equity shares

Offer price :1.62 crores equity shares at Rs. 10 each

Listing at :Hyderabad and OTCEI

Issue opened on :July 27

Issue closes on :August 10

Lead manager :Brescon Corporate Advisors